Economic Development Strategies and Initiatives

Transcription

1 Economic Development Strategies and Initiatives Playing the Economic Development Game under the New Realities Presented at Virginia Government Finance Officers Association Spring Meeting May, 2016 Prepared by:

2 Why Economic Development Success has Become More Important Local Governments are increasingly finding it difficult if not impossible to achieve new revenue sources solely from Assessed Value growth; Political Factors nationwide and locally are making it more difficult to raise existing revenues from traditional sources (e.g. Real Estate, Personal Property, etc.); 1

3 Why Economic Development Success has Become More Important (cont.) Local governments post Recession of 2009 have deferred considerable, needed Capital Improvement Projects. The back log is real and ways to pay for it are limited; and, Certain government expenditures are rising with localities having little to no ability to control these, for example, Virginia Retirement System required contributions and local School Funding Shares, healthcare and other insurance costs, etc. 2

4 What does Economic Development Success Mean? Among other factors, Economic Development success is measured by: 1) Increased Revenues to Local Government(s). 2) Increased Revenues to the Local/Regional Economy. 3) A potential offset to the post-2009 spike in Unemployment Rate(s). 3

5 What does Economic Development Success Mean? (cont.) Among other factors, Economic Development success is measured by: 4) A potential offset to the area s level of Under-employment. 5) Where applicable, an opportunity to increase a stagnant or declining population and particularly to assist in keeping young people from moving elsewhere. 4

6 The Current State of Economic Development and the New Realities Competition amongst localities and/or Regions is perhaps keener than ever. Expectations of considerable up front dollars by a locality have become the norm particularly for larger, transformative projects. Outside Companies have professional consultants who serve as liaisons, negotiators, etc. on behalf of these companies. 5

7 The Current State of Economic Development and the New Realities (cont.) Existing businesses are increasingly aware of a locality considering using the above to leverage for a better deal if they stay put or at least within the borders of the same State. Local governments are at risk of damaging their fiscal integrity if they are not prudent and strategic in their approach to Economic Development. 6

8 How to Evaluate Economic Development Opportunities It is important to consider the following factors, among others: 1) Self-Supporting nature of the opportunity. 2) Implications on Tax Supported Debt Capacity. 3) Appropriation and Credit Risk. 4) The precedent it may set for existing businesses and potential companies looking at your locality. 7

9 Case Study Stone Brewing Company and Richmond, Virginia Richmond Office One James Center 901 East Cary Street 11th Floor Richmond, VA Charlotte Office Independence Center 101 N. Tryon Street Suite 1220 Charlotte, NC Senior Vie President Roland Kooch Senior Vice President

10 Background In Fall, 2014 through Winter, 2015, the City of Richmond successfully negotiated for Stone Brewing Company of San Diego County, California to locate its first production/distribution facility outside of California. The tenth largest craft brewery in the Nation was seeking to locate an East Cost Facility meaning a facility east of the Mississippi River. In September 2014, Stone committed a Letter of Intent ( LOI ) to build its Project in Two Phases, summarized on the next page. 9

11 Background (cont.) Phase 1 Production/Distribution Facility to be completed and operational in Spring, 2016, consisting of an approximate 200,000 s.f. production/distribution facility, which will produce upwards of 800,000+ barrels of beer at full capacity. Estimated Cost = $23,000,000. Phase 2 Bistro Facility estimated to be completed and operational approximately 5 years after Phase 1 on or about Estimated Cost = $8,000,000. The Project is a potentially transformative project for the City s East End along the City s Riverfront and near the existing/growing Rocketts Landing development. 10

12 Background (cont.) In addition to the Letter of Intent, the City executed a Performance Agreement with Stone that gave specific terms and conditions with respect to capital investment, jobs creation, production, incentives/grants and City Obligations, amongst other details. Davenport & Company LLC, as Financial Advisor to the City, while not involved with the negotiations of the LOI with Stone, has been involved with the Project since August As such, Davenport was tasked with: Developing a potential Plan of Finance for providing funds to the EDA; Analyzing the potential economic benefits of the Project; Identifying/quantifying any potential risks and benefits related to the Project; and Outlining a Timetable for Action that best met Stone s desired schedule. Davenport s role was to provide the City with all available information necessary to make an educated decision as to whether or not to proceed with the Project. 11

13 Constructing a Performance Agreement What were the Key City Obligations in the Performance Agreement? Per the terms of the Performance Agreement the City has the following Obligations: Local Economic Development (LED) Grant of $1,500,000 paid in six installments from FY 2017 through FY Sustainability Grant of $500,000 paid in five installments from FY 2017 through FY City Obligations in the Performance Agreements included funding certain Infrastructure Improvements shown below: The Total Amount of Infrastructure Improvements were estimated at $7.8 million. The City had already funded from its CIP and/or other sources approximately $2.7 million. It was estimated that an additional $5.1 million was necessary to fulfill the remaining infrastructure improvements. Additional infrastructure investment would permit additional development along the Riverfront to occur. Irrespective of Stone, the City needed to make certain capital investments in streets, roads, infrastructure, etc., in order to make the area suitable for any development. 12

14 The Plan of Finance Based on conference calls and research conducted with City staff, the City Attorney s Office, the City s Bond Counsel, and the EDA s Bond Counsel, the collective legal counsels agreed that using the City s General Obligation Line of Credit/General Obligation Bonds was the most efficient means of providing the desired lease terms in the LOI. In order to facilitate the lease rate required by the LOI, the City issued long-term General Obligation (G.O.) bonds using its Aa2/AA+/AA+ credit rating and grant the funds to the EDA. In return Stone entered into a 25-year lease of the Project, payment of which will be passed back to the City and applied to the debt service on the long-term G.O. Bonds. Without the City s backing of the bond transaction (be it General Obligation or Moral Obligation), meeting Stone s desired lease terms in the LOI would have been extremely difficult, if not impossible. Note: Stone said that funding the lease is essentially built into its projections and paid for by savings in transportation costs. Specifically, the City took the necessary steps to authorize the use of the City s regular capital-related Line of Credit and made funds available by mid-january 2015 to meet Stone s schedule. The Line of Credit was used to provide immediate access to funds, and was replaced with long-term taxable G.O. Bonds issued in November of

15 The Plan of Finance (cont.) Davenport believes that the G.O. Bonds issued for the Project should not have counted against the City s capacity from a debt policy/capacity perspective since it was being repaid from a definable and known stream of lease revenues from day one. However, the G.O. Bonds did count against the City s legal debt limit and the Credit Rating Agencies did count it in their overall analysis because it is not funding an essential public project. The City was subject to the Commonwealth s imposed legal debt limitations restricting G.O. indebtedness to 10% of assessed valuation of taxable real property, however, the City s financial policy was far stricter at 4.5% of taxable assessed valuation. 14

16 The Plan of Finance (cont.) Davenport, in our capacity as Financial Advisor, regularly revisits the City s overall Financial Policy Guidelines. Typically, this work occurs every 2 to 4 years. At this time, the City/Davenport were in the process of revisiting the City s Financial Policy Guidelines, which included debt obligations and certain Economic Development/ Moral Obligation Projects, as well as changes in GASB and other regulatory amendments. This Project s upfront funding source of the Company s payment for debt service did not affect the City s debt capacity for other City projects. 15

17 Potential Economic Benefits What were the potential economic benefits to the City over the 25 year Lease term? The table below shows the various revenues (net of incentives) to the City based on the full development of both Phases of the Project assuming that Stone s projections materialized for the entire 25 year duration of the Lease. Phase 1 Benefits Total Phase 2 Total General Fund Utilty Fund * Subtotal Phase 1 Benefits Phases 1 & 2 Revenues: Machinery & Tools Tax $11,056,100 $0 $11,056,100 $0 $11,056,100 DPU PILOT Payment $5,885,598 $0 $5,885,598 $0 $5,885,598 Meals Tax $0 $0 $0 $4,680,000 $4,680,000 Real Estate Tax $1,929,240 $0 $1,929,240 $450,240 $2,379,480 Sales Tax $0 $0 $0 $975,000 $975,000 Business Property Tax $407,000 $0 $407,000 $0 $407,000 BPOL $0 $0 $0 $295,320 $295,320 Beer/Wine License $0 $0 $0 $1,500 $1,500 Gross Total Potential Revenues $19,277,938 $0 $19,277,938 $6,402,060 $25,679,998 Incentives: Less:Real Estate Investment Grant ($1,500,000) $0 ($1,500,000) $0 ($1,500,000) Less:Sustainability Grant ($500,000) $0 ($500,000) $0 ($500,000) Less:Enterprise Zone ($49,500) $0 ($49,500) $0 ($49,500) NET Total Potential Revenues $17,228,438 $0 $17,228,438 $6,402,060 $23,630,498 * Utility benefits were not included in the analysis at the time. The Lease Payment made by Stone over the 25 year lease was the repayment source for the G.O. Debt Service related to the City s investment in the Stone Facility. 16

18 Potential Risks Related to the Project What were the risks to the EDA (as Developer/Landlord/Lessee) and City (as Financier) with respect to the Project? 1) Going concern risk 2) Management risk 3) Business model risk 4) Competition risk 17

19 Potential City Benefit (Liability) Phase 1 Only In addition to the Potential Risks, the potential benefits (liabilities) to the EDA/City if only Phase 1 was built and the Company ceased operations for reasons beyond its control (i.e., ceased to exist in its current form in the City) were as follows: If the company ceased operations, Davenport calculated: The Benefit to the City (i.e., total lease payments and net potential revenues less debt service); and The remaining City G.O. Bonds outstanding that were issued to construct the Project. 18

20 Potential City Benefit (Liability) Phase 1 Only (cont.) (Amounts in $millions) After 5 Years After 10 Years After 15 Years After 20 Years Benefit $2.06 $5.76 $9.68 $13.47 Less: Remaining City G.O. Bonds Outstanding $20.61 $17.42 $13.18 $7.53 Net City Benefit (Liability) ($18.55) ($11.66) ($3.50) $

21 Mitigating any Potential Risks/Liability Related to the Project How could the Net City Liability (in the event the Company ceased operations) be mitigated? Davenport incorporated below a possible revenue source from the sale and repurposing of the Stone Facility should the company cease operations assuming both Phases 1 & 2. * Assumed sale of facility for 50% of cost. 20

22 Mitigating any Potential Risks/Liability Related to the Project Phase 1 & 2 (cont.) After 5 Years After 10 Years After 15 Years After 20 Years Benefit $2.06 $7.29 $12.86 $18.26 Less: Remaining City G.O. Bonds Outstanding $28.61 $24.04 $18.06 $10.24 Net City Benefit (Liability) ($26.55) ($16.75) ($5.20) $8.02 Plus: Potential Revenue* $15.5 $15.5 $15.5 $15.5 Net Remaining City Benefit (Liability) ($11.05) ($1.25) $10.30 $23.52 * Assumed sale of facility for 50% of cost. (Amounts in $millions) 21

23 Summary Observations The Project was a solid and transformative one in the East End area of the City (i.e., the Greater Fulton Community and Rocketts Landing). Around 300 new jobs were be created. The Project sped up the rejuvenation of an area of the City that has been underserved and added to the quality of life in the City and more specifically, in the East End. From day one the Project provided a positive cash flow to the City and a return on investment with Phase 1 and even more so with Phase 2. 22

24 Summary Observations (cont.) Over the life of the Project with both Phases, the revenue to the City approximated $35 million. The City, through the issuance of G.O. Bonds, provided the EDA with approximately $23 million for Phase 1. The debt service related to the G.O. Bonds will be repaid entirely by the lease with Stone. As such, this debt will not be a burden on the General Fund so long as Stone makes the lease payments. This concept was the same for Phase 2. 23

25 Summary Observations (cont.) Davenport estimated that the City would achieve a break even after roughly 10 years versus the 25 year expected Lease term. The break even could be less than ten years because the Project had an immediate and positive impact on the assessed value of the East End (i.e., the Greater Fulton Community and Rocketts Landing), which in turn provided additional tax revenue to the City. Capital improvements related to Phase 2 made additional real estate available for development. 24

26 Resume David P. Rose, Senior Vice President David P. Rose Senior Vice President Public Finance Direct: Mobile: East Cary Street, Suite 1100 Richmond, VA Davenport & Company LLC Member: NYSE FINRA SIPC Resume David P. Rose has served as Financial Advisor to public sector clients in the Commonwealth and across the United States for more than 30 years. Mr. Rose is highly experienced in all aspects of local government finance including: general infrastructure financing; economic development strategies; schools; water, sewer, electric, and solid waste enterprise systems; local and regional jails; convention centers and public arenas; publicprivate partnerships involving transportation and other projects; and rating agency strategies, including assisting localities achieve rating upgrades and maintain these upgraded ratings. Mr. Rose was selected by the Bond Buyer, the industry wide daily newspaper of municipal finance, as the first Chairman for their inaugural Mid-Atlantic Public Finance conference. Additionally, Mr. Rose has been appointed by previous Governors of Virginia to serve on an international business partnership, the Virginia-Israel Commission, as one of 32 Virginians honored. Mr. Rose is also a long standing member of Davenport s Board of Directors. Mr. Rose was educated at Kenyon College ( ) and Harvard University ( ). Select Clients Served: Abingdon (Town of) Appomattox County Chesterfield County Danville (City of) Falls Church (City of) Franklin County Hampton (City of) Henry County Isle of Wight County James City County Leesburg (Town of) Lexington (City of) Loudoun County Loudoun County Water Auth. Northumberland County Portsmouth (City of) Powhatan County Purcellville (Town of) Richmond (City of) Scott County PSA Smyth County Suffolk (City of) Washington County West Point (Town of) Wise County Wise County PSA 25

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